System price

The system price for each hour is determined by the intersection of the aggregate supply and demand curves which are representing all bids and offers for the entire Nordic region.

The system price denotes an unconstrained market clearing price since the trading capacities between the bidding areas have not been taken into account in finding this price.

The majority of the standard financial contracts traded in the Nordic region use the system price as reference price.

There are also standard financial contracts with reference to specific area prices.

Area price

If power flows between bidding areas exceed the trading capacity; area prices are calculated. In the area price calculation the price mechanism itself is actually relieving grid congestions.

By increasing the price in the deficit area, the members in this area will sell more and purchase less while in the surplus area a lower price will lead to more purchase and less sale. The area price calculation is iterated so that the capacity between the high price area and the low price area is utilized to the maximum. In this situation the flow of power will always go from the lower price (surplus) area to the higher price (deficit) area.

Whenever there are grid congestions, the Nordic area is divided into several price areas. The members’ bids in the bidding areas on each side of the congestion are aggregated into supply and demand curves in the same fashion as in the system price calculation. A volume corresponding to the trading capacity on the constrained connection is added as a price independent purchase in the surplus area and a price independent sale in the deficit area. In the deficit area the sale will give a parallel shift of the supply curve while in the surplus area the additional purchase will give a parallel shift of the demand curve.

The area price in the surplus area and the deficit area is found in the new equilibrium points given after the addition of the flow between the areas as purchase and sale respectively. The price is relatively lower in the surplus area and relatively higher in the deficit area.

If the contractual flow of power between the bidding areas is within the limits set by the transmission system operators, then the system price is the only price for that specific hour throughout the entire market area. In this situation, the system price is identical to the area prices and also the settlement price for all power traded in that hour.

You can also read about price calculation principles.